We close 2023 with outstanding results from all EDM-managed funds. After a period of unease prompted by the return of inflation in developed economies and a radical shift in monetary policy (from expansionary to contractionary), markets have refocused on company fundamentals. In 2022, we remarked that fund results did not reflect the reality and quality of the companies in which we invest. Despite growth in earnings-per-share and healthy cash generation, the funds suffered declines that left valuations at historically low level which, in our opinion, were baseless.
So, what happened in 2023? Markets again focused on what’s important, rewarding quality businesses over the rest. Thus, EDM’s investment style triumphed yet again, as demonstrated by our fund results (see the Evolution of EDM funds table in the Q4‘23 Letter from the Chair). Unlike the noise generated by macroeconomic perspectives, our micro approach granted us the conviction necessary in 2022 to reap the rewards of good corporate results.
Our Investment team remains fixated on what’s important, ensuring we invest in leading companies with unique competitive advantages, consistent with the generation of value over the long term. We invite you to learn more about some such examples below.
EDM Inversión L €: +18.09% YTD
For the EDM Inversión fund, concentrated on Spanish equities, we highlight our position in Inditex, one of the year’s absolute best performers (≈+58%) and the top contributor to the fund’s profitability in 2023. Third-quarter results were excellent, with double-digit revenue growth and substantial improvements in gross margin and EBIT margin. It also revised gross margin expectations upward and increased cash conversion because in a scenario of double-digit sales growth, the company is able to reduce inventories by 5%. Sales in the first part of the quarter grew 14%, consistent with previous periods. The estimated EPS for 2023 (YTD) was also revised upward by nearly 30%.
EDM Strategy L €: +26.01% YTD
With regard to EDM Strategy, a fund invested in European companies that are global leaders, we highlight CRH, whose shares performed exceptionally well in 2023, gaining +68%. A leading supplier of building materials in the US and Europe, the company has higher-than-expected pricing power (improving margins even as inflation rises), thanks to its dominant position in various regional markets and the limited probability of increased capacity for environmental reasons. In addition, several stimulus plans provide medium-term demand visibility for infrastructure and non-residential construction. The eventual inclusion on US indices, after transferring its listing to the NYSE, should close the discount with which it trades vis-à-vis US comparables (75% of CRH profits originate in the US).
EDM Pointer: +13.16% YTD
In the case of EDM Pointer, which invests in the top small and mid caps, we highlight Spie. The French company, a leader in multi-technical industrial maintenance services, is responsible for maintaining some of the most technically complex elements of facilities ranging from office buildings to nuclear power plants to wind farms. Ninety percent of its business is recurring, with multi-year contracts including inflation-update clauses, and an EBITDA-to-FCF conversion rate of 90%. The business is stable, with annual profit growth of 7-8%, dividend yields of 3-4%, and trading at 10-11x profits. We believe, based on previous experience, that a business with these characteristics should yield an annual return of 12-13% (growth + dividend + multiple expansion) with no major surprises.
EDM Global Equity Impact L €: +21.24% YTD
At the conclusion of its second year, our global equity fund with sustainability targets has obtained excellent results. One of the primary contributors to the fund’s annual performance was Veolia, which rose +19.5%. This French company is a front-runner in the environmental services sector and a global leader in the optimised management of water, energy, and waste resources. Eighty-five percent of its sales stem from long-term contracts, immune to the cycle and, in many cases, linked to inflation, protecting operating margins. Moreover, in the wake of the Suez merger, we believe there is still potential for further cost synergies. We currently estimate earnings-per-share growth of 11% annualised over the next five years, with strong cash generation and faster-than-expected deleveraging.
EDM American Growth L €: +34.92% YTD
In our American fund, we highlight Microsoft, not only given its good performance (+58.19%) in 2023, but also for its level of disruption in society over the past year. The agreement with Open AI, creator of Chat GPT, marks the beginning of the path to the full integration of AI in our daily lives. Microsoft capitalised on this agreement to launch Copilot, the AI tool incorporated into the Office suite, designed to boost workplace productivity. This partnership between Microsoft Office and Chat GPT will allow the company to offer users more value and, therefore, increase the subscription price. We estimate EPS growth of around 10% over the next five years, but we would not be shocked if the company delivered an upside surprise given the potential of this latest launch.
In 2024, we remain confident in the conviction that guides our decision-making: price and EPS growth will converge in the medium term. Naturally, the path to generating profits and value for patient investors will not be devoid of short-term turbulence, which we will have to navigate. To that end, we will continue to focus on fundamental analysis and discipline with regard to valuations.
EDM Investment Team
